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Monday Oct012012

Analysis: Uralchem, a Minority Shareholder in TogliattiAzot, seeks to reduce social spending to maximize its profits badly needed to pay down debt
Monday, October 1, 2012 at 02:17PM

Dmitry Mazepins Uralchem, a large chemicals and mineral fertilizers group, has been trying to establish control over Togliattiazot (ToAZ), the worlds largest producer of ammonia an important ingredient of most fertilizers and other industrial chemicals for years. Lacking free cash or borrowing capacity (Uralchem reported net debt of US$ 970 million at year-end 2011, with little hope of refinancing in the current market, its IPO ambitions dashed for the time being, and its ability to pay down the debt at a fairly low level), the chemicals conglomerate has been willing to resort to unorthodox methods of corporate action, according to the Russian media. A recent open letter by Togliatti residents to the nations top law enforcers provides some idea of these methods, which include false, misleading information about the allegedly impending industrial and environmental disaster, about a second Fukushima offers of money to [city residents] to write complaints against Togliattiazot to law enforcers and regulators threatening, negative messages [throughout the city on walls, fences, and billboards], and [] unauthorized protests by hired demonstrators from out of town The story goes back to the summer of 2008, when Uralchem bought a sizable 7.5% stake in ToAZ from Viktor Vekselbergs Renova Group, for an undisclosed amount, subsequently reported by Uralchem as US$ 225 million

(discounted from the then market value of US$ 240 250 million). Russian business publication Expert speculated that Mazepin was attempting to maximize his exposure to rising resource and fertilizer prices, and to capture more of the value chain through vertical integration. However, the deal was closed at what soon proved to be the crest of an overheated market. To make matters worse, the ToAZ stock was overbought at the time, on leaked rumors of the deal, more than doubling within three months shortly before the deal. While the broader stock market has recovered after the 2008 credit crunch, the ToAZ stock has never seen the summer-2008 highs. Uralchem borrowed US$ 75.8 million from Sberbank in a repo transaction, using its expanded 9.7% stake in ToAZ as collateral in 2009, which demonstrates the magnitude of this decline. This has limited Mazepins options for recouping its investment in ToAZ. Essentially, the only way to do this in the current market is by maximizing cash flows to shareholders in ToAZ, and through increasing his stake in ToAZ at a low price. Increasing the shareholding in ToAZ would bring the additional benefit of gaining control over the companys cash flows. This, in turn, would enable the controlling shareholder to redirect the cash generated by the company from growth and social projects to shareholder payouts. This would serve the interests of Mazepin as the new controlling shareholder, while Togliatti, its residents and Togliattiazot would go by the board as they are gradually starved of cash. Togliattiazot Chairman Sergey Makhlai told the Russian government daily Rossiyskaya Gazeta in a recent interview that some minority shareholders are urging [us] to drop social programs and facilities [ToAZ] supports and reduce social expenditures, claiming they are too high. Makhlai went on to say, we are not going to do this. People need to know they can expect to be [safe and] comfortable working at the company. We are here for the long term, and we are responsible for the standard of living in the city [Togliatti] and the [Samara] Region. He also added that an alleged takeover would turn the company into a resource appendage to suit someone elses interests, and therefore would be unacceptable. Early on, the media warned that Dmitry Mazepin had a history of gradually ousting core shareholders in the companies he acquired. RBC Daily wrote that shareholder conflict would be inevitable, noting that Mazepin had gained control in all the companies in which he ever bought an equity stake except for one, Perm Fertilizers.

Ironically, the companies under Mazepins control have often been found guilty of the same environmental and corporate violations he is claiming are going on at ToAZ and other companies to bring down the value of the stock.. Methods of gaining control have been very similar to those described in the open letter about the attack on ToAZ: criminal and environmental investigations, smear campaigns in the media, attacks on core shareholders and management, as described in an August 15, 2012 article in Ploschad Svobody. In a recent development, Uralchem has used several channels to obtain access to ToAZ share register and the list of shareholders entitled to vote at extraordinary general meeting in September 2011. After an arbitration court ruled that Uralchem was provided copies of these documents, Uralchem instigated a raid by the Federal Investigative Committee to obtain the originals a move reminiscent of instances when registers of shares of other companies were rewritten to dilute the stakes of core shareholders. However, after ToAZ issued a statement that this may be just such an attempt, Uralchem backed down immediately, asking the federal investigators to drop charges. Current shareholders in ToAZ, the management, and residents of Togliatti all hope that the company would be allowed to carry on its business without disruption, in the best interests of its shareholders, employees, and the local residents.

RUXX | Share Article tagged dmitry mazepin, makhlai, mazepin, sergei makhlai, togliattiazot

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